Against the Grain

Lumber Liquidators

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Investing in area you know nothing about… I agree with Maverick, for any well diversified portfolio you need exposure to any big industry. Pharma and Biotech is a huge part of the overall market. Not having exposure there means you are overweighting the things in your portfolio. (For us that’s been energy… sad face.) But how do you wisely invest in an area you know little about? Going with a hot tip can work, but I’m leaning towards more diversification. How about some sector ETFs? IBB (Biotech), IYH U.S. Healthcare), IHI (U.S. Medical Devices), IHE (US. Pharmaceuticals), and IHF (U.S. Healthcare Providers) are all healthcare-related stock ETFs with a particular focus.

On another note, I’m interested in Lumber Liquidators (LL). There was a 60 Minutes story about how some of their flooring has too much formaldehyde and may cause cancer. Now cancer is not good, and causing cancer is both evil and expensive. But I’m thinking this story is probably overblown. Anytime a financial story is broken by the popular media it has a dramatic effect on the stock price. The 60 minutes story was actual proposed by a hedge fund that is short the stock!

Now LL has had some issues. They are expanding and yet sales growth has really slowed down. Same store sales were negative for all of 2014, and margins came down. But the stock has been cut in half in the last month (from $70 to $35), at $35 bucks they are trading at less than 1x revenue, at historical net income margins of 6-8% the stock trades between 12x – 16x depressed earnings. (all home material stocks took a beating this quarter)

I’m debating whether I should wait for a March 12th call management is putting together to address these issues or pick up some stock before hand. If they announce an increase in the buyback plan jump on before it’s too late.